Stock, Bonds, & Mutual Funds II
What is Market Capitalization all about?
A Definition
• A measure of a public company's size. Market capitalization is the total dollar
value of all outstanding shares
• It's calculated by multiplying the number of shares times the current market
price. This term is often referred to as "market cap“
Some Key Points
• Market capitalization is just a fancy name for a straightforward concept
• Quite simply, it refers to the value of a company, that is, the market value of its
outstanding shares
• This figure is found by taking the stock price and multiplying it by the total
number of shares outstanding
Let’s do a computation
• For example, if Cory's Tequila Corporation (CTC) was trading at $20 per share
and had 1 million shares outstanding, then the market capitalization would be
$20 million ($20 x 1 million shares). It's that simple
• Or your company is called Tom Ford’s Cheap Stock (TFCS) and sells for $5 a
share. How many shares would you have to have outstanding to be
considered a nano cap?
Size is Important
• Mega Cap: Market cap of $200 billion and greater
• Big/Large Cap: $10-$200 billion
• Mid Cap: $2 billion to $10 billion
• Small Cap: $300 million to $2 billion
• Micro Cap: $50 million to $300 million
• Nano Cap: Under $50 million
Another way to look at it
• Keep in mind that there is no authoritative set of guidelines for distinguishing
small caps from large caps.
• For example, the Investment Company Institute (an association of investment
companies) provides the following classes:
– Small Cap: Less than $1 billion
– Mid Cap: $1 billion to $5 billion
– Large Cap: Over $5 billion
Mega Cap
• This group includes companies that have a market cap of $200 billion and
greater
• They are the largest publicly traded companies and include names such as
Microsoft, Exxon, Wal-Mart, and General Electric
• Not many companies will fit in this category, and those that do are typically
the leaders of their industry.
Big/Large Cap
• These companies have a market cap between $10-$200 billion
• Many well-known companies fall into this category, which includes names like
Yahoo, IBM and Citigroup
• Typically, large-cap stocks are considered to be relatively stable and secure
• Both mega and large cap stocks are often referred to as blue chips.
Mid Cap
• Ranging from $2 billion to $10 billion, this group of companies is considered to
be more volatile than the large and mega-cap companies
• Growth stocks represent a significant portion of the mid caps
• Some of the companies might not be industry leaders, but they are well on
their way to becoming one.
Small Cap
• Typically new or relatively young companies, small caps have a market cap
between $300 million to $2 billion
• Although their track records won't be as lengthy as that of the mid to mega
caps
• Small caps do present the possibility of greater capital appreciation - but at the
cost of greater risk
Micro Cap
• Mainly consisting of penny stocks, this category denotes market capitalizations
between $50 million to $300 million fall into this category
• The upward potential of these companies is similar to the downside potential
• These stocks do not offer the safest investment, and a great deal of research
should be done before entering into such a position
Nano Cap
• Companies having market caps below $50 million are nano caps
• These companies are the most risky, and the potential for gain is often
relatively small
• These stocks typically trade on the pink sheets or OTCBB.
Defensive Stocks
Should you have some of these in your portfolio?
Defensive Stocks
• Mostly made up of the consumer non-cyclical group
• Companies in the category are somewhat immune to the ups and downs of the
economy
• Examples might be companies that are involved in:
– Tobacco
– Soap
– Drugs
– Diapers
Food and beverages
• These companies make money in both good and bad times
• Their products or services are necessary for our everyday living or habits
Cyclical Stocks
• Stocks within the automobile, housing and paper sectors can act this way
• Such stocks mirror the economy
• Many such investments:
– will have large rewards in good times
– can experience some rather dynamic behavior in tough times
• However, when disposable income becomes scarce, expect hard times
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7 Tests of Defensive Stocks:
Benjamin Graham's Intelligent Investor
Adequate Size of the Enterprise
– A smaller company is generally subject to wider fluctuations in earnings
– $100 million of annual sales or be a public utility company should have no
less than $50 million in total assets
Sufficiently Strong Financial Condition
– Have a current ratio of at least two
– Long-term debt should not exceed working capital
– For public utilities the debt should not exceed twice the stock equity at book
value
– These act as a strong buffer against the possibility of bankruptcy or default.
Earnings Stability
– No reported loss over the past ten years
– Having at least some level of earnings indicates stability
Dividend Record
– The company should have a history of paying dividends on its common
stock for at least the past twenty years
– This should provide some assurance that future dividends are likely to be
paid
Earnings Growth
– A company's profits keep pace with inflation
– Net income should be increasing
Moderate P/E Ratio
– The current price of the stock should not exceed 15 times its average
earnings for the past three years
– If greater, you may be overpaying
Moderate Ratio of Price to Assets
– Current price should not be more than 1 1/2 times the book value last
reported
Some Defensive Stocks
• The software business is less cyclical than most other technology fields
– Adobe Systems (ADBE)
– Informix (IFMX)
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Microsoft (MSFT)
Oracle (ORCL)
and Symantec (SYMC)
• Some others
– J.P. Morgan Chase & Co. (NYSE:JPM) Historically, banks were good but?
– SINA Corp. (Nasdaq: SINA), a Chinese online media company
– eBay Inc. (Nasdaq: EBAY)
– Tyco International Ltd. (NYSE: TYC)
Some Other Choices (but investigate)
• Coca Cola
• Proctor & Gamble
• Exxon Mobile
• General Electric
• DuPont
• Banking Conglomerates (in the old days)
• Utilities
• Blue Chip, Old Companies
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So You Want to Buy
Brokers are the people who handle customer orders to buy and sell securities
Don't forget that a broker is a salesperson
Minimum balances required to open an account range from thousands of
dollars to nothing at all
All brokerages charge commissions to execute orders. This fee varies widely
depending on the type of brokerage
Look out for hidden fees for transactions like the transfer of assets or inactivity
Full-service brokers offer much more, but they're expensive
Discount brokers don't offer the extras, but they're affordable
Online brokerages have changed the industry by lowering costs and blurring
the line between discount and full-service
The type of brokerage you require depends on your investing style and the
advice you need
It's possible to check the background of all brokers and firms
The type of account you need depends on the type of securities you want to
hold
There are many ways to execute an equity order and this is a whole class in
and of itself
US Stock Exchanges
AMEX
New York Stock Exchange (NYSE)
NASDAQ
The Arizona Stock Exchange
Chicago Stock Exchange
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Chicago Board Options Exchange
Chicago Board of Trade
Chicago Mercantile Exchange
Kansas City Board of Trade
Minneapolis Grain Exchange
Pacific Stock Exchange
Philadelphia Stock Exchange
Various Indexes
Dow Jones Industrial Average: 30 widely traded, blue chip companies
traded on the New York Stock Exchange - This is a weighted index
S&P 500: 500 industrial, utility, transportation and financial stocks of the New
York and American exchanges and the NASD Over the Counter Market. It
represent about 80% of the value of the NYSE
NASDAQ COMPOSITE: This index covers all the roughly 3,500 stock traded
over the counter
VALUE LINE COMPOSITE: It is an index of about 1,700 NYSE, Canadian,
OTC, regional exchanges and NASDAQ stock that is un-weighted
RUSSELL 2000: this is a capitalization weighted index of the bottom 2,000 of
the 3,000 of the largest capitalized U.S. securities
WILSHIRE 5000 EQUITY: This is the broadest based indicator. It's
capitalization weighted index includes literally all the actively traded U.S.
issues- NYSE, American exchanges plus NASDAQ. The Wilshire 5000
capitalization is about 81% NYSE, 2% AMEX, and 17% OTC
10/24/08